All businesses operating in Canada, from multinational corporations to the smallest start-up, are required to keep business records recording their income, expenses, and, ultimately, the profits on which they will be taxed. Traditional formats such as paper ledgers and journals have largely given way to the use of electronic means such as spreadsheets and software. The Canada Revenue Agency (CRA) has adapted its rules required record keeping to address this reality. When it comes to the basic rules around business record keeping requirements, however, not much has changed. This blog summarizes those basic rules which apply to all business record keeping, regardless of format, as well as the newer rules developed to address electronic record keeping by businesses.
The Basic Rules of Business Record Keeping
There are no exceptions to the rule which requires anyone who carries on a business or engages in commercial activity in Canada to keep accurate records of their business or commercial activities. Besides legal compliance, it just makes business sense to have an accurate understanding of a business’ inventory, expenses, revenues, and profits. Business expenses which can’t be documented in some way can’t be claimed as a deduction from business income, and business tax credits claimed must be made with supporting documentation. Finally, without accurate accounting of its current financial state, a business is unlikely going to be successful in obtaining external financing through loans or investments.
The CRA does not mandate any specific form or structure for business record keeping. Rather, it requires that all records kept by a business must:
•be reliable and complete;
•provide the taxpayer with the correct information needed to enable it to meet its tax obligations and to calculate any credits to which the business is entitled;
•be substantiated by supporting documents to verify the information contained in the records; and
•include other documents, such as appointment books, logbooks, income tax and GST/HST returns, scientific research and experimental development (SR&ED) vouchers and records, and certain accountants’ working papers, that assist in determining the businesses obligations and entitlements.
Additional record keeping requirements are imposed on businesses that are incorporated, such as the requirements of keeping records of meeting minutes of directors’ and shareholders’ meetings, as well as keeping and accurate record of who owns the shares of the corporation and any transfers of those shares. And of course, separate record keeping must be done for each separate entity.
The CRA accepts books and records which are prepared in either or both paper and electronic formats, as long as all supporting documents are also maintained accurately and are accessible.
How Long Must Records be Kept?
The general rule for business record keeping requires that they must be kept for six years after the end of the last tax year to which they relate. For example, business records pertaining to the 2014 tax year must be kept until the end of 2020.
However, there are special circumstances in which different rules apply. If a business’s income tax return for a particular year is filed late, then the records relating to that return should be kept until six years from the data of filing. Similarly, if a notice of objection or appeal has been filed with CRA for a particular assessment, the records relating to that objection or appeal should also be kept for six years after the objection or appeal is disposed of, or the time for filling for a further appeal is expired, whichever is later.
Should an incorporated business close, the business records must be kept for six years after the end of the tax year in which the business ceased to function. When a corporation is dissolved, business records must be kept for two years after the date of dissolution. Finally, in the case of an amalgamation or merger, business records must be kept as if the newly formed corporation was a continuation of each of the original corporations.
Early Destruction of Business Records
Business owners who wish to destroy the records of a business earlier than the time period outlined above may do so, but only with the permission of the CRA. Permission can be obtained in either of two ways: an application can be made to the business’s Tax Services Office (http://www.cra-arc.gc.ca/cntct/tso-bsf-eng.html), or the business owner can complete and file Form T137, Request for Destruction of Books and Records (http://www.cra.arc.gc.ca/E/pbg/tf/t137/).
Where Must Records be Kept?
Generally, the rule for business records, in whatever format, is that it must be kept at the place of business or the business owner’s residence in Canada, unless permission is obtained from the CRA to store those records outside Canada. Even if permission is obtained to do so, the business is still responsible for making those records available for review by CRA representatives in Canada when such access is requested (or the business can incur the cost of having CRA representatives travel to the location outside Canada where the business records are kept.)
For electronic business records, CRA’s position is that such records kept outside Canada and accessed electronically from this country are not considered to be records kept in Canada. It does, however, provide an administrative concession to assist businesses in this position, where the Agency will accept copies of those records for review purposes if:
•the CRA is satisfied that the copies of the records are true copies;
•the records are made available to CRA officials in Canada in an electronically readable and usable format; and
•the records contain adequate details to support the tax returns filed with the CRA.
Further information regarding keeping electronic business records can be found on the CRA website at http://www.cra-arc.gc.ca/E/pub/tg/rc4409 or by calling the CRA’s business enquiries line at 1-800-959-5525.
Few business downers like to spend time on the intricacies of record keeping or maintenance, when their energy and time could be better spent on the business. However, accurate record keeping does not only keep your business compliant, it also help your business run more smoothly. For assistance with your day to day business bookkeeping needs, or to get consultation on setting up your bookkeeping systems, contact RHN today. Our online Client Portal makes submitting and maintaining your electronic business records quick and simple, so you can go back to spending time building your business.
The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.
This post has been prepared for general information purposes. It is not advice. The information presented may not fit your unique situation, please consult one of our trusted business advisors at RHN CPA for further clarification and interpretation of your particular circumstances.